Morgan Advanced Materials plc (LON:MGAM) Shares Could Be 49% Below Their Intrinsic Value Estimate

In This Article:

Key Insights

  • The projected fair value for Morgan Advanced Materials is UK£5.40 based on 2 Stage Free Cash Flow to Equity

  • Morgan Advanced Materials' UK£2.75 share price signals that it might be 49% undervalued

  • The UK£3.77 analyst price target for MGAM is 30% less than our estimate of fair value

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Morgan Advanced Materials plc (LON:MGAM) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for Morgan Advanced Materials

Step By Step Through The Calculation

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF (£, Millions)

UK£70.8m

UK£82.7m

UK£99.0m

UK£110.9m

UK£120.7m

UK£128.8m

UK£135.4m

UK£140.8m

UK£145.5m

UK£149.5m

Growth Rate Estimate Source

Analyst x5

Analyst x5

Analyst x2

Est @ 12.02%

Est @ 8.87%

Est @ 6.66%

Est @ 5.12%

Est @ 4.04%

Est @ 3.28%

Est @ 2.76%

Present Value (£, Millions) Discounted @ 9.2%

UK£64.8

UK£69.4

UK£76.1

UK£78.0

UK£77.8

UK£76.0

UK£73.2

UK£69.7

UK£66.0

UK£62.1

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£713m